Assume that your company owns a subsidiary operating in Australia. The subsidiary maintains its books in the Australian Dollar (AUD) its local currency and its functional currency. Australia is not a highly inflationary economy. The CEO of the Parent is Chairman of the Board of Directors of the Australian subsidiary. Several key functions of the Australian subsidiary are managed by the Parent such as: legal function, accounting function, treasury and debt functions. The Australian subsidiary sells its products to the Parent and to unaffiliated customers in a 50/50 ratio. Purchases made by the Australian subsidiary are made with vendors it develops and some vendors are similar to those the Parent uses. The Parent’s volume of purchases along with the Australian subsidiary purchases provides for discounts on purchases of raw materials from vendors. The Australian Subsidiary sets its pricing for products. The Australian subsidiary sets its strategy for the business and consistent with the Parent’s wishes. The Australian Subsidiary expends and receives cash in primarily the Australian dollar. Determine the correct foreign currency translation/remeasurement method and fill in the correct rate appropriate to each account. Following are the subsidiary’s financial statements (in AUD) for the prior and most recent years: (in AUD) Current Year (in AUD) Current Year
Income statement: Balance Sheet Assets
Sales 9,450,000 Cash 2,689,470
Cost of goods sold (5,670,000) Accounts receivable 2,192,400
Gross profit 3,780,000 Inventory 2,816,100
Operating expenses (2,457,000) Property, plant & equipment, net 5,208,840
Net income 1,323,000 Total assets 12,906,810
Statement of retained earnings Liabilities and stockholders' equity
BOY retained earnings 4,961,250 Current liabilities 1,602,720
Net income 1,323,000 Long-term liabilities 3,734,640
Dividends (132,300) Common stock 630,000
Ending retained earnings 6,151,950 APIC 787,500
Retained earnings 6,151,950 Total liabilities and equity 12,906,810
The relevant exchange rates for the $US value of the Australian Dollar (AUD) are as follows:
Current Year
BOY rate $0.86
EOY rate $0.73
Avg. rate $0.79
PPE purchase date rate $0.75
LTD borrowing date rate $0.75
Dividend rate $0.74
Historical rate (common stock and APIC) $1.05
a. The subsidiary’s income statement, statement of retained earnings, balance sheet, and statement of cash flows into $US for both years (assume that the BOY Retained Earnings is $803,250 at the beginning of the prior year).
(Current Year) Subsidiary (in AUD) Rate
Income statement:
Sales 9,450,000
Cost of goods sold (5,670,000)
Gross profit 3,780,000
Operating expenses (2,457,000)
Net income 1,323,000
Statement of retained earnings:
BOY retained earnings 4,961,250
Net income 1,323,000
Dividends (132,300)
Ending retained earnings 6,151,950
Balance sheet:
Assets
Cash 2,689,470
Accounts receivable 2,192,400
Inventory 2,816,100
Property, plant & equipment,
net 5,208,840
Total assets 12,906,810
Liabilities and stockholders' equity
Current liabilities 1,602,720
Long-term liabilities 3,734,640
Common stock 630,000
APIC 787,500
Retained earnings 6,151,950
Cumulative translation adjustment -
Total liabilities and equity 12,906,810